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Servitization A Model for Growth

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In essence, servitization is about manufacturers offering additional services to supplement their products in order to grow their businesses. Having developed from a business need for commercial advantage in an increasingly competitive global market, servitization is being widely adopted as a win-win model, characterized by more sustainable, predictable new revenue streams and customer satisfaction.

Amongst numerous successful examples of B2B servitization, Dutch electronics firm Philips now provides LED lighting-as-a-service to Amsterdam-Schiphol airport enhanced by ‘Internet of Things’ connectivity. LED lamps are incredibly efficient but expensive, so this service agreement where Philips sells ‘light’ to the airport works well for both parties. Philips is responsible for the performance and durability of the system, and by using energy-efficient LED lamps the airport uses 50% less electricity for its lighting.

There are even examples of B2C servitization. Apple moved from fighting legal battles, protecting its innovations from cheaper ‘me too’ offerings, to setting up user friendly Apple stores designed to offer lots of ‘hands on’ experience and helpful advice from assistants who are all Apple enthusiasts. Additional services helped Apple keep ahead.

Aston Business School’s Advanced Services Group is a unique centre of expertise in servitization and advanced services. In the following article, its experts offer their perspective on why and how companies all around the world are adopting this transformational business model:

A transformational change of focus

The global manufacturing industry is being transformed by servitization. Over the next three years 65% of the world’s manufacturing capacity will switch from production to services as their main revenue source. This transformational model will affect the entire manufacturing sector, whether firms are large or small and products are simple or complex. Servitization offers firms new opportunities to develop new revenue streams, or capture and monetise the value of services they are already providing without charge.

The servitized future

Servitization offers a new paradigm for the interaction between the manufacturer and its customers. Already, many business have begun the journey into a servitized future by augmenting the range of services that they offer, to include repair and maintenance for example. These services can strengthen existing customer relationships; secure additional revenue throughout the product lifetime; and help to retain customers for future sales.

Advanced services

But the most exciting opportunities are offered by ‘advanced’ services in which the customer buys an ‘outcome’ rather than a product: an office buys ‘document management’ rather than a printer-copier or an airline buys ‘thrust’ rather than a jet engine.

These outcomes are coupled with special contractual features that make them more appealing to the customer. These additional value-add features include pay-for-use, assured product performance and even commitments to innovate products and reduce costs over time. In return for this added value, the customer agrees to long-term contracts of 2-5 years, or even longer.

The manufacturer has switched its focus from merely designing and selling a product, to understanding the customer’s business goals and selling the ‘capability’ that helps customers achieve these goals. It bundles a range of products and services customised to specific customers’ business processes, delivered through a partner relationship.

The rationale for servitization

So why should manufacturers do this?

They benefit from improved commercial resilience: long-term contracts prevent competitors gaining a foothold, securing predictable cash flow and buffering against economic downturns. They develop more intimate relationships with customers, revealing further business opportunities and revenue growth.

Servitization also benefits society as economic activity becomes more localised with an increase in improved employment and skills development. The environment also benefits as customers adopt new, cleaner technologies and manufacturers are incentivised to make products last longer with minimum energy loss and materials use.

Delivering advanced services

Delivering advanced services often requires a complex re-thinking of both the internal organizational structures and processes, and the external partner, supplier and customer networks:

Manufacturers create facilities that support products in the field; workshops, service centres, and field service technicians frequently become co-located with customer’s operations. Some modifications take place locally so that products can be kept in use, and relationships with distributors are adjusted to enable direct communication with customers. Firms form joint ventures or sell direct to the market, where staff become relationship builders, able to flex to customer need.

Digital technologies are used to monitor products, giving advanced warning of faults, and allowing faster maintenance and repair. Technological innovation also helps improve both product and service design, meaning better performance and reduced cost. Business processes become more proactive and integrated with the customer’s, meaning issues are addressed before they become problems. Design processes are better informed about performance, so products and services improve.

Supply chain effects

In delivering advanced services, transformations occur throughout the supply chain network. Suppliers change their business models to support advanced services, and partnerships with digital technology providers are formed.

Finance is provided so that customers do not have to own the products; performance measures then focus on the outcome for customers rather than merely sale and delivery.

Servitization is therefore shaping a new and different future for manufacturing businesses.

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